Is Now the Time to Buy Charles Schwab [SCHW]?

Charles Schwab (SCHW) is one of the largest brokerage firms in the US.  Unfortunately, it has been trading in step with the regional banks, and that has been a huge problem for the stock.

SCHW was trading close to 87 in January. Then Silicon Valley Bank went under in March and regional banks plunged, taking  SCHW along for the ride. Within a couple of days the stock hit a low of 45, a large volume of buying came in and pushed it back up to around 52.

It’s not a Regional bank

It’s still unclear to me with SCHW is trading along with the regional banks, since it doesn’t have the same risks as banks. While it does pay interest on cash that its brokerage customers have sitting in their accounts, it also earns interest from client margin accounts. The interest revenue far exceeds the interest expense, and as rates rise, that revenue continues to rise at a greater clip than the expense. SCHW also earns revenue from its proprietary mutual funds and ETFs as well as from trading commissions. Also, institutions on almost 89% of the stock, which should moderate trading volatility.

SCHW recently came out with positive earnings and guidance. They have plenty of liquidity to cover even the worst case scenarios and their customer base is not leaving them in any material way. Most clients who’ve used a broker platform for a while tend to stick with it. And customers primarily have their money invested in financial instruments as opposed to sitting in a bank account. So the perceived risk for a brokerage customer is much less than a regional bank customer.

But it trades with the Regional Banks

Just because the SCHW fundamentals are very different from a regional bank, it still is considered to be part of the regional bank sector. That means that as the sector gets hit, SCHW will most likely trade down along with it. Something like, “throwing the baby out with the bathwater.” Therefore, any decision you make about trading this stock has to recognize that as much as you think SCHW is different than the regional banks because it is a brokerage, it will most likely move with the regional bank sector, for the most part. There will come a point, I believe, at which investors will recognize the difference and buy SCHW. I wish I knew exactly where that point will be, but the best we can do is look at the chart and try to find a potential support level.

The SCHW Daily Chart

The main thing I want to focus on in this daily chart is volume. When SCHW hit a low of 45, a strong wave of buying volume came in and pushed the stock all the way up to where it closed at around 52. The stock then came back down on lighter volume but again the buyers came in to support the stock at around 47-48.

If you take a close look at the volume you’ll notice that the buying at support was relatively much stronger than the selling volume around it. The selling volume on this most recent move lower has been much lighter.

If we compare the recent selling volume on SCHW with the selling volume on a Truist bank (TFC), considered to be one of the stabler regional banks, you’ll notice that the TFC volume is much heavier. The other regional banks reflect the same heavy selling pressure whereas the SCHW selling volume seems much more muted.  This could be a signal that the selling in SCHW is a weak move and could reverse.

This move lower in SCHW looks like it’s a sympathy move with the rest of the regional banking sector as opposed to a move to specifically target SCHW. The lack of volume indicates a lack of conviction.

The 45 level was where the buyers came in with conviction back in March. It could act as support again.

Bottom Line

If you don’t already own SCHW, I definitely wouldn’t buy it before I see it hold 45 and strong buying volume coming in at that level. Even if it does hold support, it still will, most likely, be traded together with the other regional banks, which means that it probably won’t be going much higher in the short term. But if you want to try and trade it if it starts reversing at 45, you’ve got a well defined area to stop out at — if it breaks 45 and continues lower. Looking at the premarket action today (May 4, 2022), we’ll probably have our answer pretty soon. If you do decide to hold it for the longer term, the stock is paying around a 2% dividend.

Here’s a screencast of the SCHW trade setup: